ET Now: What do you make of the CRR cut? Clearly a big positive for banks?

Madhusudan Kela: Yes, it is a positive and it is a response by the regulator to a challenging situation. I have been mentioning that the liquidity has been quite constrained in the system, with over Rs. 1 lakh crore borrowing continuously by banks from RBI and that has been there for almost six months now. So the liquidity situation has been quite constrained and this will go down pretty well for the markets.

ET Now: But taking into account the Jan 25th rate cut and today's rate cut, the RBI has given back something like Rs 80,000 crore to the banking system. Do you believe this is enough? After you have seen this money come back and after advance tax outflows have gone, do you believe that the deficit picture is going to improve significantly or should we still expect levels of Rs 130,000-140,000 crore in the system?

Madhusudan Kela: It will improve temporarily but I still maintain that in the medium term, both the government as well as the RBI would need to do much more to curtail the medium term liquidity crunch. This has to be seen in the backdrop of already slowed down capex cycle.

So we have to remember that the credit offtake has not been as good as the historical level in the last 6-12 months. So if the capex cycle picks up, then that can put an additional burden on the already constrained liquidity in the medium term.

The second factor is currency, which is something no one knows where it is going but if it goes to uncomfortable levels, as it happened, when it went to around 53-54, RBI had to step in to cool off that pressure. That again takes away liquidity

Oil price is the third thing which is absolutely uncertain and no one knows where it is going. So I would say that in the immediate term, I would look at where the fiscal deficit of the government is on the 16th of March and what additional steps which the RBI will take to ease off liquidity in the medium term.

However, this I must tell you, from a market perspective, this is a positive news and is better than expectation. So we must say at least whatever is entrusted on the regulator, they are responding very positively.

ET Now: Most people are trimming their GDP growth numbers to sub 7 percent. How many more cuts like this are you expecting in this financial year or the coming one?

Madhusudan Kela: If I look at the historical context, in CRR terms, central banks in their history have not gone below 5 percent. This is the first time that they will go below 5 percent in terms of CRR. Now you can make an argument that there is no need of even 4.75% of CRR to be maintained but I would say from CRR perspective, may be maximum of 50 or 75 bps more over the next quarter or two.

ET Now: The point you made about RBI intervention in the currency markets should the rupee fall to 52-53 levels, likely sucking out liquidity, do you see a scenario like that playing out again in the near term?

Madhusudan Kela: It is entirely possible. Where the dollar is going and where the currency markets are in, given India's own vulnerability to oil, if there is a problem in Iran, it is entirely possible that the rupee may go 52-53 and even go to 54. But these are not events which you would like to predict or build in your own model. These are events which you end up reacting to. You cannot plan whether there is going to be a strike in Iran or not.

ET Now: But the point is nobody planned for this and the reality hit us in our faces in November last year when the rupee fell and that was the trigger for the liquidity crisis in the system that we are seeing today.

Madhusudan Kela: My point is that if you are asking me if the rupee goes to 53-54, will RBI need to intervene, then the answer is an affirmative yes.

We must not forget that currency depreciation in the medium term has highest impact on inflation in a country like India.

ET Now: You are saying you are not looking at levels of Rs 53-54 but how do you see the March quarter ending for the Indian rupee?

Madhusudan Kela: I would say plus or minus 2 percent. If the oil prices remain at $120-$125, then I would say plus or minus 2 percent for the rupee from here.

ET Now: Are you factoring in another interest rate movement as we head towards March 15th?

Madhusudan Kela: There is a compelling need to do so but RBI will watch where the fiscal deficit is from the government perspective and possibly take a call depending on where that number is.

ET Now: 75 bps of course has come in as a surprise. Were you expecting this and what is the future course now?

Madhusudan Kela: I was expecting it as of Thursday. May not be 75 bps but I was expecting some action from the RBI, because you see this is a historical high number Rs. 1,90,000 crore borrowing of banks from RBI, it is like more than 3% of the total banking system.

RBI's comfort level is 1% so this move was anticipated and this has come ahead of the advance tax number because let us not forget that there Rs. 60,000 crore more of liquidity will go out of the market only on account of advance tax payment on 15th of this month. So this was much anticipated and much needed but I do not think market in general was expecting more than 50 bps CRR cut.

ET Now: CRR is effectively a tax on banks because they earn nothing on that money that they park with the RBI. There has been this big debate as to whether CRR is a monetary policy tool or a liquidity management policy tool. Now, the fact is it has admitted that CRR is really a liquidity management tool and that is really the reason they gave when they cut the CRR on the 25th of January. Now what stops them from lowering CRR to a levels where liquidity becomes comfortable and then hike it again when it believes that liquidity is too much? There is this whole view in the market that once the RBI cuts the CRR, it cannot hike it immediately.

Madhusudan Kela: I would agree with you that this is one dynamic tool and a readymade tool which is available with the RBI. There is no easier tool than cutting CRR which is available with RBI.

The other thing which the RBI is doing is purchase security through OMOs. So I would reiterate, the RBI is doing whatever is required to ease the system but this has to be looked in the context of where the government borrowing is and what the fiscal deficit of the country is. So the overall liquidity scenario in the medium term will have to be addressed by both having a tighter fiscal deficit and these steps by RBI.

ET Now: In the January policy, the RBI had said that any meaningful reduction in interest rates by the RBI will be constrained by a lack of fiscal consolidation at the centre. How important to you is the Budget in terms of getting that strong signal from the FM of his intent in bringing the fisc in order, which in turn will help the RBI bring interest rates down to meaningful levels?

Madhusudan Kela: It is very very important, I cannot re-emphasise that word because it will give us three clear signals. First, clearly the budget deficit is going to be much higher than what was anticipated for 2012. While the original anticipation was at 4.6 percent, I think it will be close to 5.8 or 5.9 percent for the year which just ended.

So from a fiscal consolidation perspective and to adhere to FRBM which we had agreed, I would look at this fiscal deficit number because this should be at least below 5% for 2012-2013 and within the fisc.

Then there is the agenda of the government, as to what they will do to subsidies and reforms, what they will do to reforms. So that one number will tell us as to where that whole agenda is driving and that again becomes very important from a market perspective, given what happened in state elections.

ET Now: Many people thought the cut will happen, but 75 bps is perhaps higher than what many had expected and also the timing - it has come a week ahead than it was slotted to.

Madhusudan Kela: As I said, this has not surprised me, I was expecting this to be done on Thursday because given the practical situation in terms of the tightness of liquidity.

But it is always very difficult to precisely time any move by the regulator but I am in a way pleasantly happy that they have done it and have improved the sentiment of the debt market as well as overall sentiment prevailing vis-a-vis liquidity.

ET Now: We have seen large government borrowings crowding out private investment in the second half of this year. Do you believe that is trend will continue? Again, do you believe the government's borrowings, that it does indicate on Friday, will be somewhere in line with what it ends up borrowing in the current financial year?

Madhusudan Kela: Now pretty much only 15-20 days are left, so whatever they had to borrow, they would have pretty much done for this year. Going forward, this time around we have to give it to the government because what they budgeted was significantly lower oil prices and what happened was significantly high.

Obviously because of the state elections, the retail prices of petrol and diesel could not be increased. So the pressure on borrowing for the second half was significantly higher than what the market would have anticipated in the beginning of the year. What they did actually last year in 2010-2011 evened out the borrowing and that is the best thing to do. So I would expect that trend to resume, unless you have another shock in fiscal deficit or in the form of oil prices. They will even out the borrowing for 2012-2013.

ET Now: A quick word then on the fact that this whole CRR cut is really a liquidity management tool and many experts and analysts do believe that this should be perhaps used far more aggressively by the RBI. Do you think the trend has perhaps begun now?

Madhusudan Kela: Fortunately by the grace of God, our regulators have been very conservative and they have a lot of defence mechanism to counter such emergencies which happened in the market place. The high rate of CRR of 5-5.5 percent was a kind of defence mechanism for the banks. So I would say yes, this tool is available but it should be used very prudently and it should be used in a situation like this.

Just imagine, if your CRR was already at 1.5 or 1 percent, then there was no other option left with the RBI. So I would say they used this tool very prudently and that should be the trend which should be seen in future.

This defence mechanism, in my perspective, should be carried on and should not be liberalised to an extent where we are not left with anything to counter an emergency situation.